I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Sunday, August 1, 2010

Bracketed Order

Bracketed Order allows traders/investors to manage the trade/position by “bracketing" an order for opening a position (i.e. the “main order”) with two opposite “side orders” for closing the position in order to limit losses and lock in profits, without having to constantly follow the position.
The order quantity for the “side orders” matches the original order quantity of the “main order”.

When the Bracketed Order is placed, the trader/investor must determine the corresponding prices for all the 3 component of the Bracketed Order (One “main order” for opening position and two opposite “side orders” that bracketed the “main order” for closing the position).
When one of the side orders is being executed, the other side of the order will automatically be cancelled.

Depending on the “main order” for opening a position, there are 2 types of Bracketed Orders:

1) BUY ORDER
The Buy Order will open the position by buying a security.
The price for the Buy Order can be set as a Market Order (to buy at the market price) or Limit Order (to buy at the Limit Price or lower).
The Buy Order will then be bracketed by:
a) Sell Limit Order: The Limit Price to sell should be above the Buy Order’s Price.
This Sell Limit Price serves as Profit Target in order to lock in profits.
b) Sell Stop Order: The Stop Price should be below the Buy Order’s Price.
This order serves to limit losses.
Other than Sell Stop Order, you can also use Sell Stop Limit Order or Sell Trailing Stop Order for this purpose.

2) SELL ORDER
The Sell Order will open the position by selling a security.
The price for the Sell Order can be set as a Market Order (to sell at the market price) or Limit Order (to sell at the Limit Price or higher).
The Sell Order will then be bracketed by:
a) Buy Limit Order: The Limit Price to buy should be lower the Sell Order’s Price.
This Buy Limit Price serves as Profit Target in order to lock in profits.
b) Buy Stop Order: The Stop Price should be above the Sell Order’s Price.
This order serves to limit losses.
Other than Buy Stop Order, you can also use Buy Stop Limit Order or Buy Trailing Stop Order for this purpose.

Example 1:
You place a Sell Order for Stock STU at the price of $20, along with a Buy Limit Order with Limit Price of $15 and a Buy Stop Order with Stop Price of $25.

If the price falls to $15 or lower (and never go up touching the Stop Price at $25), the Buy Limit Order will be triggered and sent to market to buy back the shares at $15 or lower. You will then realize at least $5 profit. In this case, the Buy Stop Order at $25 will automatically be cancelled.

If the price increases to $25 or higher (and never go down touching the Sell Limit Price at $15), the Buy Stop Order will be triggered and sent to market to buy back the shares at the market price. You will then realize at least $5 losses. In this case, the Buy Limit Order at $15 will automatically be cancelled.

Example 2:
You place a Buy Order Call Options of DEF at the price of $3.00, along with a Sell Limit Order with Limit Price of $4.00, and a Sell Trailing Stop Order with Trailing Amount of $0.50.
Since the current option premium is $3.00, the Initial Stop Price will be $2.50 (= $3.00 - $0.50).

If the option premium increases to $4.00 or higher, the Sell Limit Order will be triggered and sent to market to sell the options at $4.00 or higher. You will then realize at least $1.00 profit. In this case, the Trailing Stop Order will automatically be cancelled.

If the option premium increases to $3.20 first, that it starts to fall. In this case, the Stop Price would reset to $2.70 (= $3.20 - $0.50). It the premium continues to drop and pass $2.70 (the new Stop Price), the Sell Stop Order will be triggered and sent to market to sell the shares at the market price. You will then realize at least $0.30 losses. In this case, the Sell Limit Order at $4.00 will automatically be cancelled.

Advantage & Disadvantage of Bracketed Order:
The advantage of Bracketed Order is that it allows the trader/investor to manage the trade without having to constantly follow the position. They also can control how much they’re willing to lose and determine what the Profit Target Price is, based on their planned risk/reward ratio. Hence, this can help take some emotions out of your trading decision.

However, the disadvantage of Bracketed Order is that since you place a limit on how much profit you want to make, you might potentially “lose money” should the price continues to move to your expected direction. In order words, you could not let the profits run using this kind of order.

Disclaimer:
This order is a more complicated order, not all brokerages can accept this order.
Even the procedures, rules, terms and/or how to place this order may vary from one to another brokerage. Hence, you need to check with your own brokers specifically for the details before placing such order.

For the list of other types of order, go to: Types of Orders in Trading.

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